Saturday, July 7, 2012

The media white noise surrounding Facebook's IPO can lead to confusion, but, really, the issues are simple. And, they relate to your exam in many ways. First, what IS an "IPO"? Think of a successful company in your area--what if they wanted to be in 25 cities, needed storefronts, delivery vans, manufacturing equipment, what have you? What they need is "capital," and they raise it from high-risk investors interested in buying a percentage of the company's bottom line through something called "common stock." In my little DVD materials, I mention in passing that "after reading the prospectus, the investors like the risk/reward characteristics of the company enough to buy the stock." Well, that's what should happen--in this case, it didn't. If the folks who got suckered into buying the Facebook IPO had spent an hour or two on a Sunday morning reading the prospectus, they would have noted some curious things. Like, first, even though an IPO is designed to raise much-needed capital for expanding businesses, Facebook didn't really need any capital. Their balance sheet was very strong already. Not that the company was actually getting most of the money anyway--more than HALF of the shares "investors" bought in the IPO were being sold by existing shareholders, the early investors cashing in on their American Dream (good for them, btw). So, the IPO was really just a way to cash in on the Facebook brandname for a handful of early investors, who knew that when a stock is priced at a P/E ratio of OVER ONE HUNDRED, it's probably time to sell. And, sell, they did. The buyers of that stock are already down more than 25% on their "investment," and they can yammer on and on about how their holding is now a "buy-and-hold position," but that's total BS. That stock is going to drop another 50% from where it's at imho, and then folks can sit on it for generations without ever seeing a gain. Some people have the mistaken impression that a great brand name = a great company = a great stock. Not. Facebook's growth is slowing massively and can not support a P/E of over 100. If that P/E drops to, say, 25 . . .well, just be glad you didn't buy in.